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Thailand floods have NetApp treading water

NetApp executives admit they are concerned about how the hard drive shortage caused by floods in Thailand will affect their sales over the next few months. Those concerns prompted the vendor to lower its forecast for next quarter and brought negative reactions on Wall Street.

Of course, NetApp isn’t the only company that will feel the sting of a hard-drive shortage. All storage companies will suffer from a shortage of drives, and customers will suffer too as prices go up. But NetApp also has other issues. Its revenue from last quarter was slightly below expectations, and NetApp is facing increased competition from rival EMC in clustered NAS and unified storage. There is also a potentially sticky matter concerning sales of NetApp storage into Syria for use of an Internet-surveillance system – a situation that NetApp claims it had nothing to do with.

NetApp Wednesday reported revenue of $1.507 billion last quarter, slightly below analysts’ consensus expectation of $1.54 billion. NetApp said its sales were lower than expected in nine of its 46 largest accounts, causing the miss. “The rest of the business was generally positive,” NetApp CEO Tom Georgens said, although he admitted the recent rollout of the vendor’s FAS2240 system prompted customers to hold off on buying entry-level FAS2000 products.

At least four Wall Street analysts downgraded NetApp’s stock today following its results and comments on next quarter, and the price of NetApp’s shares dropped 9% in pre-market trading. NetApp executives said they have adequate hard drive supply through the end of the year, but they have a difficult time predicting what will happen after that.

“The impact of the Thailand flooding can potentially be the biggest swing factor [over the next six months],” Georgens said. “Although enterprise class drives are considered to be the least impacted, we still anticipate some amount of supply and pricing complexity. We have all heard the predictions of the industry analyst and the drive vendors themselves. Some of the information is conflicting, and most of it is changing daily in regards to scope and ultimate impact.”

On the positive side, NetApp said its FAS6000 enterprise platform revenue grew 100% year-over-year, its midrange FAS3000 series increased 34%, and the E-Series acquired from LSI Engenio earlier this year increased 11% from the previous quarter.

Georgens said NetApp’s solid state Flash Cache product is becoming common on high-end arrays, and hinted that NetApp would add data management software for caching data on server-based PCIe flash cards. “I think you’ll continue to see innovation on the flash side from NetApp, both inside and outside the array,” he said.

Still, NetApp executives were forced to deal with unpleasant topics during their earnings call:

EMC Isilon
Isilon’s scale-out NAS platform sales have spiked this year since EMC acquired Isilon and put its massive sales force behind it. But Georgens said NetApp’s new DataOnTap 8.1 software allows greater cluster capability for FAS storage, and its E-Series (from Engenio) and StorageGrid (from Bycast) object storage platform also increase its “big data” value against Isilon.

Georgens said NetApp’s problems haven’t been caused by EMC’s new VNX unified storage series, despite EMC’s push of its SMB VNXe product into the channel. “The VNX has not caused much of a change in dynamics in many accounts,” he said. “The VNXe in terms of EMC’s channel incentives is something that we’ve seen more of. That’s been the strongest part of our portfolio, so I don’t think they’ve slowed us down much. Nevertheless … that’s been something that’s generated more discussion within NetApp than actually the VNX itself. I think the VNX itself has been inflicting more pain on Dell than on NetApp.”

Sales to Syria
Georgens ended the call by addressing a news story reported by Bloomberg News last week that U.S. congressmen are calling for an investigation into the roles played by NetApp and BlueCoat involving sales of their products into Syria. According to Bloomberg, NetApp’s products appeared in blueprints for an Internet surveillance system being implemented in Syria by an Italian company. Georgens said NetApp did not support the sale of its storage to Syria and “we are just as disturbed that his product is in a banned country as anybody else.” He also pointed out that NetApp only sells storage, not the applications that Syria could use to intercept e-mails.

Georgens added that NetApp is helping the U.S. government in its investigation. “I can tell you we did not actively seek out, we did not choose to sell to the Syrian government, and we’re not looking for a way to circumvent U.S. law to sell to the Syrian government,” he said. “We have no interest in providing product to a banned country. I just wanted to make sure that was clear.”

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